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Running the Numbers on SiriusXM as Liberty Stalks Cable Giants

NEW YORK (TheStreet) - It's been about a week since Liberty Media (LMCA) unveiled its $3.68 a share takeover offer for a remaining stake in SiriusXM Holdings (SIRI), in an all-stock transaction that would give the combined company a $27 billion market cap at week-ago share prices.

SiriusXM shares are currently trading at $3.80, indicating that investors expect Liberty Media eventually to bump its all-stock offer price. Liberty Media, meanwhile, is trading at about $140 a share, 3% lower than when the offer was first announced, making the all-stock transaction even less amenable to SiriusXM's minority shareholders.

There are many steps left in this deal, including a recommendation by SiriusXM's special committee, shareholder votes and, most importantly, added information on Liberty Media's grand plans as it seeks to consolidate the satellite radio giant's earnings and cash flow. It is also important to note that Liberty Media already owns a controlling stake in SiriusXM.

Nevertheless, Carl Icahn's activist efforts in the takeover of Dell show that minority shareholders still deserve representation and a fair M&A process by SiriusXM's special committee. Courts also appear amenable to valuing appraisal rights, a potential lingering piece of the Dell transaction and something that could emerge as an issue in Liberty Media's efforts for SiriusXM.

But the $38 billion elephant in the room on Liberty Media's consolidation of SiriusXM is Time Warne Cable (TWC).  Liberty Media -- chaired by John Malone -- wants to acquire the cable giant by way of a joint bid with Charter Communications (CHTR), a recovering cable industry bantam-weight that Liberty helped rescue a few years ago.

Further insight into Liberty Media's plans for Time Warner Cable may be as important to minority SiriusXM shareholders as any changes to Liberty Media's offer, which features a swap of SiriusXM shares for non-voting Liberty Media shares.

As such, it is important to figure out a valuation for all the moving parts of a Liberty Media and SiriusXM combination, and how that could affect a Liberty Media and Charter takeover of Time Warner Cable.

Research analysts at Evercore Partners -- not to be confused with bankers at the firm who give fairness opinions -- maintain a $4.50 a share price target for SiriusXM, as Liberty Media works towards a full takeover. Understanding their calculations may give SiriusXM stub holders better insight into what they might expect out of a deal.

Here's How the Numbers Work

Liberty Media is interested in SiriusXM because it can consolidate a stable set of cash flows and billions of dollars in net operating loss carryforwards to its earnings, possibly helping the company in an eventual Time Warner Cable joint-bid. Meanwhile, SiriusXM's stand-alone valuation is going to be an important piece of how the company's special committee will react to Liberty Media's proposals.

Evercore values SiriusXM's core business at $3.65 a share, based on a discounted cash flow analysis that projects the firm's levered free cash flow yield at 2.9%, 4.4% and 5.7% between 2013 and 2015. That valuation also incorporates what the firm calculates as about $1.9 billion in net operating loss carry forwards. Evercore also assigns SiriusXM 88 cents in value per share for green-field opportunities like its entry into the connected-car market.

But SiriusXM's valuation may also hinge on how Liberty Media could utilize the company's assets. Evercore values SiriusXM tax synergies at $2.6 billion were Liberty to use NOLs to buy back shares, a point Liberty Media management seemed to underscore in a Friday conference call.

Amid weak guidance provided by SiriusXM, Evercore's biggest takeaway is that Liberty's interest was an expression of confidence in the company.

"We see Liberty's proposal as a clear sign of confidence in Sirius, refuting the bear arguments that Liberty wants to exit its Sirius investment and that fundamentals are on the verge of deteriorating," Evercore wrote.

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